Ring Out the Old Year: 2024 Year-End Tax Planning

Tax News You Can Use | For Professional Advisors

December 16, 2024

2024 has been a year of watchful waiting in the tax arena. Congress did not pass the Wyden-Smith tax bill, and tax planners spent the year reading the tea leaves from the presidential candidates to get an idea of what might be coming in 2025. However, even without new tax rules to respond to, there are still important tax planning actions to take before the end of this year.

Retirement Account Distributions

The required beginning date (RBD) for distributions from non-Roth IRAs and qualified plans is determined as follows:

These RBDs assume the retirement account owner is no longer working. Taxpayers who do not own 5% or more of the employing business may defer required minimum distributions (RMDs) while they are still working.

Owners of non-Roth retirement accounts who have reached their RBD, as well as all beneficiaries of non-Roth and Roth inherited retirement accounts,² have until December 31 to take 2024 RMDs. Be sure to allow processing time when requesting an RMD distribution — the penalties are significant if the RMD is not withdrawn in the correct year.

Annual Exclusion Gifts

Under current law, a taxpayer can make a gift of up to $18,000 to as many individuals as the taxpayer wishes without counting against the cumulative estate and gift tax exemption. The gift can be made outright or to certain limited types of trusts. Married couples can double that amount to $36,000. Over time, a significant sum can be moved out of the taxpayer’s taxable estate by making annual exclusion gifts regularly. For example, a married couple with four adult, married children and ten grandchildren can give away $648,000 this year by making gifts to each child, each child’s spouse and each grandchild.

One way to make annual exclusion gifts for young beneficiaries is through a 529 college savings plan. A taxpayer can “front-load” a 529 plan by making a gift of up to 5 years’ worth of annual exclusion gifts at once. This can accelerate the tax-free growth in the account and result in more assets available to pay for college. Note that this does require filing gift tax returns even though no tax is due.

To push the most appreciation to the donee, making the gifts as early in the year as possible makes sense. However, for those taxpayers who have not made them yet, there is still time. To count as 2024’s annual exclusion gift, though, the gift must be completed no later than December 31. For gifts by check, the completed date is the date the check is deposited or cashed by the recipient. To avoid having the gift treated as made in 2025, giving cashier’s checks or wire transfers can alleviate the worry about whether the checks will be cashed in time. Other gifts (such as shares of stock or interests in LLCs) also need to be delivered to the recipient before December 31.

Gifts in Excess of the Annual Exclusion

Gifts that do not qualify for the annual exclusion use up a taxpayer’s estate/gift tax lifetime exemption before generating any gift tax. Currently the exemption is $13.61 million, going up to $13.99 million in 2025. Those who have not yet used all their exemption may want to consider tax planning lifetime gifts, which present an excellent opportunity to shift the appreciation on those assets out of the taxpayer’s taxable estate. Others may only be considering larger gifts in anticipation of the sunset of the bonus exemption, which is set to be around $7 million in 2026 if the sunset occurs. Because planning takes time, it is still worthwhile to make plans for a gift before 2026 in the event there is not an extension of the Tax Cut and Jobs Act provision, and to delay implementing the plan until it is clearer what the tax legislation in 2025 will look like.

Charitable Gifts

For charitable gifts, the date of the gift for checks is the date you mail it (the mailbox rule), which can be helpful at year-end. Taxpayers with appreciated publicly traded stocks may want to consider making charitable gifts of them to get the income tax charitable deduction and avoid recognizing the capital gain. Note that, according to accountants, recent IRS audits have focused on the documentation to support the timing and value of charitable donations, especially for gifts of assets other than cash or publicly traded stock. It is particularly important to document gifts to your private foundation. Receipts for charitable donations also need to state that no goods or services were received by the donor in exchange for the contribution. Also keep in mind the limits on how big a charitable deduction can be claimed in one year, which will depend on the type of property and the organization to which it is donated. See IRS publication 526 for details (Charitable contribution deductions | Internal Revenue Service).

One particular type of charitable contribution is a qualified charitable distribution (QCD) from a retirement account. Taxpayers over age 70 ½ can direct the plan or provider to distribute up to $105,000 to a public charity and have that amount excluded from income. An exclusion from income is more valuable than a deduction because it is not phased out and can lower a taxpayer’s Adjusted Gross Income (AGI). AGI is used to determine eligibility for a number of deductions and credits as well as the phaseout of certain deductions and Medicare premiums. A QCD that lowers AGI can have a positive ripple effect on the taxpayer’s return in ways a deduction that does not lower AGI cannot.

Income Tax Planning

Right now, it appears that income tax rates are likely to stay the same or potentially go down under a unified Republican administration beginning in 2025. With rates unlikely to be any higher than they are now, it makes sense to minimize taxable income for 2024. Steps to minimize income this year include:

• Tax Loss Harvesting. Identifying assets with capital losses that can be sold to offset capital gains and even some ordinary income. It is important to avoid both selling and buying the same assets too close in time (it does not matter the order of the purchase and the sale, and they do not have to be in the same account) as that could be subject to the wash-sale rule. However, even in a rising market there are investments that have losses, and recognizing those can reduce your 2024 tax bill
• Defer Income. Deferring the recognition of income until after the first of the year may defer when the tax is due, from April 15, 2025, to as late as April 15, 2026 (assuming the taxpayer otherwise meets the safe harbor rules for estimated taxes). This can include deferring compensation, delaying Roth IRA conversions and waiting until January to sell capital assets
• Accelerate Deductions. Conversely, cash method taxpayers can lower their 2024 tax bill by paying deductible expenses before the end of the year. A caveat is for those impacted by the State and Local Tax Cap on deductibility. For those impacted, it does not make sense to accelerate the payment of state and local taxes, as there has been discussion of making the cap more generous or lifting it completely in the new year
• Take Advantage of Green Energy Tax Credits. The new administration has indicated they plan to repeal all or part of the Green Energy Tax Credits enacted as part of the Inflation Reduction Act, including the electric vehicle tax credit. If a taxpayer is planning on shopping for an EV, it might be better to make that a holiday gift and not a New Year's resolution
• Bracket Management. Plan, when possible, to take actions that generate income when the taxpayer is in the lowest bracket. This might include a Roth IRA conversion, deciding when to start Social Security payments or whether it is better to withdraw assets from a traditional IRA earlier. For example, a taxpayer who turned 73 in 2024 has the option to take their first RMD in 2024 and their second in 2025, or to delay the first one until April 1, 2025, and then take the second by December 31, 2025. To evaluate these options, taxpayers will want to consult their tax return preparers to project their applicable tax brackets for 2024 and 2025, based on the available information

Pay Yourself First

Common advice for savers is to pay yourself first. At year end, make sure not to leave money on the table.

• Maximize Retirement Account Contributions. Do not miss the chance to save tax-free for retirement. Take advantage of catch-up contributions for those over age 50, and consider contributions for a non-working spouse. In addition to maximizing the taxpayer’s own contributions, a helpful use of those annual exclusions is to assist children and grandchildren with earned income in maximizing their own contributions
• 529 Account Reimbursements. If a student has paid rent or other eligible expenses out of pocket, be sure to request reimbursement distributions for expenses from this calendar year by December 31
• Medical and Childcare Savings Accounts. Taxpayers can submit reimbursement claims after December 31, but the expense needs to be incurred this year
• Tax Withholding. If, in consultation with their return preparer, a taxpayer who is employed discovers that they have under withheld or paid too little in estimated taxes, penalties can be avoided by having more withheld from the final paycheck of the year. Unlike estimated payments, withholding is treated as having been paid in ratably through the year, so it can reduce underpayment penalties even for earlier quarters